Perry Warjiyo Governor of Bank Indonesia

SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

1 BANK INDONESIA’S ANNUAL MEETING 2019

2 3 BANK INDONESIA’S ANNUAL MEETING 2019

TABLE OF CONTENTS

Greetings 5

Introduction 6

Global Economy: Diminishing Globalisation, Increasing Digitalisation 7

Three Important Lessons: Synergy, Transformation, and Innovation 10

Solid Economic Performance, Promising Economic Outlook 12

Bank Indonesia Policy Mix: Maintaining Stability, Boosting Growth Momentum 20

Bank Indonesia will Maintain an Accommodative Monetary Policy Stance in 2020 21

Accommodative Macroprudential Policy for Driving Economic Financing 22

Accelerating Financial Market Deepening 24

Payment System Policy for Electronification and Economic Efficiency 24

Payment System Innovation: Integration of Digital Economy and Finance 25

Empowering the Islamic Economy and MSMEs 30

Strengthening International Policy and Institution 30

Strengthening Synergy for Resilience, Economic Transformation, and Digital Innovation 31

4 “SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia”

Speech of the Governor of Bank Indonesia BANK INDONESIA’S ANNUAL MEETING Jakarta, 28th November 2019

His Excellency: • President of the Republic of Indonesia, Mr. Joko Widodo;

Honourable guests: • Leaders and Members of the House of Representatives and House of Regional Representatives of the Republic of Indonesia; • Leaders of State Institutions; • Ministers of Indonesia Maju Cabinet; • Chairman and Members of the Board of the Financial Services Authority (OJK) and Deposit Insurance Corporation (LPS); • Former Governors and Board members of Bank Indonesia; • Provincial Governors from all across Indonesia; • Leaders of the Banking Industry, Corporate Sector and National Media; • Awardees of 2019 Bank Indonesia Award; • Distinguished Ladies and Gentlemen.

5 BANK INDONESIA’S ANNUAL MEETING 2019

Assalamu’alaikum Warahmatullahi Wabarakaatuh, Salam Sejahtera for all of us, Om Swastyastu, Namo Buddhaya, Salam Kebajikan, Syalom

Let me begin by praising Allah SWT, God Almighty, for it is with His blessings that we can assemble here at the 2019 Bank Indonesia’s Annual Meeting. I also offer my sincerest appreciation to the President of the Republic of Indonesia for his esteemed presence this evening along with all the invited participants.

I would like to congratulate 39 awardees of 2019 Bank Indonesia Award. Banks, corporates and individuals in four areas and 14 categories ranging from monetary and financial system stability management, payment system and rupiah currency management, those supporting Bank Indonesia policy as well as individual contributions. The awards are organised annually, as part of the Bank Indonesia’s Annual Meeting, as a form of appreciation and national recognition to our stakeholders who have been continously supporting Bank Indonesia.

I would also like to take this opportunity to deliver our assessment on Indonesia’s economic performance in 2019 as well as the economic outlook and Bank Indonesia policy direction in 2020 that we have summarised under the theme “Synergy, Transformation, and Innovation Toward an Advanced Indonesia”. We consider this a pertinent theme as a strategy to overcome global economic headwinds to strengthen external resilience and boost national economic growth momentum toward an advanced nation in 2045. This is also a representation of Bank Indonesia’s accountability and transparency as mandated by the Bank Indonesia Act.

6 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Global Economy: Diminishing growth toward a high-income advanced Globalisation, Increasing Digitalisation economy by 2045. There are no less than five key characteristics that demand vigilance as The global economy has become more follows: unfavorable in 2019. The ongoing trade war between the United States and China First, global economic growth declined and several other countries has continued to sharply in 2019, and may not be recovered escalate, with anti-globalisation sentiment in 2020. The trade war has had a devastating taking precedence along with inward- impact on the economy, not only in the looking policies. The Brexit issue in the UK has countries involved but also affecting all reached an impasse, while other geopolitical countries around the world. The International risks continue to emerge. At the same time, Monetary Fund (IMF) and several other economic and financial digitalisation is taking international organisations have, from time place rapidly - bringing with it all the benefits to time, revised down growth projections, and risks - penetrating various economic for some countries and also global economy. segments with control increasingly in the The nature of the slowdown also shifts from hands of big tech. The current phenomenon uneven global growth to a synchronised global of diminishing globalisation coupled with slowdown. Bank Indonesia projects a global increasing digitalisation is expected to persist economic slowdown from 3.6% in 2018 to just into 2020 and beyond. Consequently, we 3.0% in 2019 and 3.1% in 2020 in the absence must consider such phenomena in terms of of prolonged trade conflict (Table 1). Economic strengthening resilience and national economic growth in the United States, China as well as

Table 1. Global Economy: Economic Growth, Trade Volume, and Commodity Prices (%, yoy)

2018 2019* 2020* World Economic Growth 3.6 3.0 3.1 Advanced Economies 2.2 1.7 1.5 United States 2.9 2.3 2.0 Euro Area 1.8 1.0 1.0 Japan 0.8 0.6 0.5 Emerging Economies 4.5 3.9 4.1 China 6.6 6.2 6.0 India 7.4 5.9 6.6 Latin America 1.0 0.5 1.8 World Trade Volume 3.4 -0.3 0.2 Indonesia Export Commodity Price Index -2.8 -4.1 -0.9

Source: World Economic Outlook (WEO) Database, October 2019, Bank Indonesia Projection Notes: *Projected

7 BANK INDONESIA’S ANNUAL MEETING 2019

many advanced and developing economies persisted with qualitative and quantitative are moderating. In fact, the threat of recession easing since the global financial crisis in 2008. looms large in several countries. In addition, Unfortunately, the range of conventional and global economic moderation has suppressed unconventional policy measures taken has not world trade volume and international succeeded in supporting the global economy. commodity prices (Table 1). This reminds us to Central banks cannot be “the only game in the warning given by President Joko Widodo at town” in dealing with trade war fallout. A the IMF-World Bank Annual Meetings in Bali in synergy in the form of national economic policy October 2018, referring to the impact of the war mix is required, encompassing fiscal stimuli and in the Game of Thrones, has become a reality. economic reforms in the real sector, to underpin The winter indeed has arrived and we must be economic growth. prepared to face the cold. Third, volatility in foreign capital flows and Second, monetary policy by itself may not exchange rates in global financial markets always be effective in addressing the adverse persists. Liquidity injections coupled with impacts of the trade dispute. The US Federal low interest rates in advanced economies Reserve, raised its policy rate in 2018 as part have encouraged global investors to seek of its monetary policy normalisation, and then more attractive yields in emerging markets subsequently backtracked and has reduced (EMs), including Indonesia, in the form of the Federal Funds Rate (FFR) three times since portfolio investments in stocks, bonds, and July 2019 by a total of 75bps in order to ease other securities. The volatility of such capital its monetary policy stance (Graph 1). With zero flows is relatively high, amplified by economic and even negative interest rates, the European dynamics, the direction of monetary policy, Central Bank (ECB) has also continued its and global financial market uncertainty accomodative policy by expanding the balance (Graph 3). Volatile foreign capital flows have sheet through liquidity injections (Graph 2). triggered exchange rate volatility in emerging Furthermore, the Bank of Japan (BOJ) has also markets, including rupiah. Furthermore, with

Graph 1. Central Bank Policy Rate Cuts Graph 2. Central Bank Liquidity Injection

(%) USD Trillion (%, yoy) 6 20 50 5 16 40 4 30 3 12 20 2 8 10 1 4 0 0 - -10 -1 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 2 6 10 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

FFRT - Lower Target ECB Main Reﬁnancing Operation Fed ECB BoJ Asset Growth (rhs) BOJ Rate BOE Rate Source: Bloomberg, calculated Source: FRED, calculated

8 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Graph 4. Interest Rate Diﬀerential and Rupiah Exchange US economy still outperforming others and a Rate Movements recent change in monetary policy direction, (%) (%, yoy) 30 the US dollar remains strong and affects 18 16 20 performance of other currency. Exchange 14 10 rate volatility, including the rupiah, is not only 12 10 0 driven by interest rate parity condition, but also 8 -10 investment risk premium (Graph 4). Maintaining 6 -20 an attractiveness yields is important, yet it is 4 2 -30 also crucial to strengthen positive sentiment 0 -40 on policy credibility and the national economic 2001 2004 2007 2010 2013 2016 2019 outlook. Consequently, various economic Interest Rate Diﬀerential Rupiah Spot Exchange Rate (rhs) reform policies will be continued to improve Source: CEIC, calculated the ease of doing business, and therefore technological innovation has led to the rapid encourage more foreign capital to Indonesia, in development of fintech in the payment system particular foreign direct investment (FDI). and in various other financial services, such as crowdfunding, peer-to-peer lending, insurance, Fourth, economic and financial digitalisation and wealth management (Graph 5). Such is growing exponentially. The advancement financial services, which used to be conducted of digital technology is extraordinary, from the by banks and other financial institutions, are internet of things to artificial intelligence (AI), further developed and taken over by fintech, block chains, distributed ledger technology prompting a risk from shadow banking. (DLT), and robotics. Digital technology has Moreover, sizeable investment in digital fundamentally disrupted production processes technology has precipitated the emergence in the industry 4.0 era, along with retail trade of giant world-class corporation, or a big tech through e-commerce, as well as health, (Graph 6). Big tech is dominating business in education, and various other segments in our digital economy and finance across the globe. everyday lives. In the financial world, digital Some have even issued private virtual or

Graph 3. Increasing Portfolio Investment Volatility Graph 5. Types of Big Tech Financial Services

USD billion 10 150 Global 8 100 Financial Crisis 6 50 4 0 2 -50 0 -100 Apple Kakao Paypal

-150 Google Tencent Amazon Samsung Facebook Du Xiaoman

-200 Art Financial

-250 (Baidu) Financial

7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 Wealth Management Credit Insurance 1 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 0 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

2 Other Payments 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: World Economic Outlook (WEO) Database, October 2019, calculated Source: Big Tech in Finance: Market Developments and Potential Financial Stability Implications, Financial Stability Board (August 2019)

9 BANK INDONESIA’S ANNUAL MEETING 2019

crypto-currency, which is encroaching upon online transactions, rather than visiting brick- the mandate of the central bank. This raises the and-mortar stores, restaurants, or banks. As question of what policies are required to ensure employees, millennials tend to be smart, the rapid development of the digital economy innovative and extroverted but with short and finance remains aligned with the national attention spans and uninterested in being interest as a new source of economic growth told what to do. Millennials have strong moving forward, thus accelerating financial and development potential in terms of start-ups as economic inclusion. Not only that, the risk of big well as e-commerce and fintech. The changes tech dominating the business and controlling that we are witnessing in this digital era granular data also demands vigilance due to require business models to evolve, while also the potential threat to fair business competition upgrading the skills of the workforce. and discourage innovation. Three Important Lessons: Synergy, Fifth, digital technology is also changing Transformation, and Innovation human behaviour as consumers and employees. This is congruent with the What do we need to do in the face of declining demography of Indonesia, where millennials globalisation and increasing digitalisation account for more than 50% of the working- with the five key characteristics mentioned age population according to 2018 data from previously? Synergy, transformation, and the Ministry of Women’s Empowerment and innovation are three keywords to strengthen BPS-Statistics Indonesia. Technology adoption resilience and economic growth toward an is much faster amongst millennials, including advanced Indonesia. mobile phones and social media (Graph 7 and 8). As consumers, they demand affordable We have synergised macroeconomic products and services in real-time, affordable and financial system policy mix among and tailored to their specific tastes through the Government, Bank Indonesia and

Graph 6. Active Users of Big Tech Companies Graph 7. Mobile Phone Penetration in Indonesia (%)

Billions Billions 2.0 0.06 94.87 91.62 87.65 83.06 77.02 1.5 0.05 70.08

1.0 0.03 51.25 43.72 36.13 0.5 0.02

0.0 0.00 2004 2006 2008 2010 2012 2014 2016 2018 Urban Rural Total lhs: Alibaba Tencent rhs: Groupon Y Generation (Millenial) X Generation Baby Boomers + Veteran Generation Facebook Kakao

Source: BIS Annual Economic Report 2019 Source: National Social Economic Survey 2017, BPS

10 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Graph 8. Purpose of Internet Access Amongst Millenials (%) low commodity prices, and the ongoing trade 83.23 war, we must continue to develop new domestic

68.01 sources of growth. We will continue to stimulate consumption and investment. While economic

46.81 transformation will focus on manufacturing, particularly automotive, clothing, electronics, and food, as well as development of 10 new 22.04 21.84 travel destinations (New Bali) along with the 12.51 9.23 5.29 maritime, agricultural and MSME sectors. The 4.53 2.11 development of economic zones and clusters Getting Doing Sending/ Social Media/ Goods/ Goods/ Entertainment Financial Getting Others Information/ School/ Receiving Social Services Services Facility Information News College E-mail Network Purchasing Selling about Task Goods/ should focus on these priority sectors. The Services Source: National Social Economic Survey 2017, BPS acceleration of connectivity infrastructure Indonesian Financial Services Authority development must continue, mainly to support (OJK) in order to strengthen national the development of the priority sectors, with economic resilience. The world is becoming more financing coming from domestic and an increasingly uncertain place, with global foreign private investors. In doing so, further economic moderation together with volatile investment climate improvements could be capital flows and exchange rates, which has achieved by streamlining investment licensing, exposed vulnerabilities and risks to crises. The particularly in the priority economic zones, thus national economic resilience we have worked boosting FDI in Indonesia. Similarly, various tax hard to achieve must be maintained. We have facilities that have been implemented will also achieved and maintained low inflation, stable be supported by upcoming new tax facilities. exchange rates, a manageable current account Meanwhile, we need to stimulate exports by deficit, a safe fiscal deficit, and stable financial accelerating downstream processing industries system. In achieveing the resilience, Bank in order to increase value-added and the Indonesia cannot work alone with its monetary competitiveness of natural resources as well as and macroprudential policy mix. Close synergy through international trade, including bilateral is therefore required with the fiscal policies and regional trade and unlocking new markets. of the government and microprudential supervision by OJK. The macroeconomic and We are nurturing innovation in the digital financial system policy mix is prioritised and economy and finance. The rapid wave optimised for stability, while actively seeking of digitalisation has provided Indonesia the opportunity to boost economic growth the opportunity to create sustainable and momentum. inclusive economic growth. Digital innovation can strengthen linkages between economic Strengthen economic transformation agents, from the smallest to the largest, from toward higher growth. As global economy is individual consumers and MSMEs to large overshadowed by dwindling global demand, corporations. Furthermore, economic and

11 BANK INDONESIA’S ANNUAL MEETING 2019

financial digitalisation unlocks the potential of contrast to a number of other countries have economic and financial inclusion, thus bridging experienced recessions or even slipped into the economic inequality gap. Therefore, crisis. innovation in the digital economy and finance is required through start-up development The solid economic growth achieved in in various segments, including the payment 2019 is projected to accelerate in 2020. system, financial services, the retail economy, Annually, the first three quarters of 2019 and MSMEs. A business ecosystem in the digital recorded economic growth of 5.07%, 5.05%, economy and finance, encompassing various and 5.02% respectively. Unfortunately, segments, such as the banking industry, despite the various stimuli introduced, global fintech, and e-commerce, integrated with economic moderation has restricted our national unicorns, is also required to strengthen ability to expand as expected. Nevertheless, competitiveness in the national interest in the household consumption remains stable, face of the current domination by global big supported by low inflation and government’s tech. In addition, the availability of public data social assistance program (bansos) as well as infrastructure is a key factor to ensure universal growing upper middle income class. Building access to granular data and information, investment growth remains solid, buoyed with adequate confidential and private by the development of national strategic data protection to ensure the sustainability infrastructure projects. Meanwhile, non- of economic and financial innovation and building investment remains sluggish despite inclusion. the latest survey conducted by Bank Indonesia point to a rebound in the last quarter of Solid Economic Performance, Promising 2019, supported by improvement in business Economic Outlook confidence. The export performance has yet to improve due to dwindling global demand and We are grateful that against a backdrop of sliding international commodity prices. Moving global economic moderation, Indonesia has forward, the policy mix instituted by Bank maintained solid economic performance with Indonesia and the Government is expected a promising economic outlook. Furthermore, to maintain national economic growth national economic stability has been momentum, which Bank Indonesia predicts maintained along with growth momentum. around 5.1% in 2019 before increasing toward What we have achieved as a country is in 5.1-5.5% range in 2020 (Table 2).

12 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Table 2. National Economic Growth (%, yoy)

2018 2019 Component 2019* 2020* I II III IV Total I II III

GDP 5.06 5.27 5.17 5.18 5.17 5.07 5.05 5.02 Around 5.1 5.1 - 5.5

Household 4.94 5.16 5.00 5.08 5.05 5.02 5.17 5.01 5.0 - 5.4 4.9 - 5.3 Consumption Government 2.71 5.20 6.27 4.56 4.80 5.20 8.25 0.98 4.0 - 4.4 3.0 - 3.4 Consumption

Investment 7.94 5.85 6.96 6.01 6.67 5.03 5.01 4.21 4.6 - 5.0 5.4 - 5.8

Exports 5.94 7.65 8.08 4.33 6.48 -1.87 -1.98 0.02 -1.0 - -0.6 2.3 - 2.7

Imports 12.64 15.17 14.02 7.10 12.04 -7.39 -6.78 -8.61 -6.8 - -6.4 0.9 - 1.3

Source: BPS-Statistics Indonesia and Bank Indonesia Projections Notes: *Projected

13 BANK INDONESIA’S ANNUAL MEETING 2019

Graph 9. Regional Economic Growth in Q3-2019 (%, yoy)

KalimanKtaanli m(8a%n)tan (8%) SumatraS (u2m2%at)ra (22%) NATIONALTIONAL 5.92 5.92 5.49 5.41 5 . 54.95 9 5 . 41 5.59 4.71 4.71 5.18 5.18 ACEH ACEH 5.17 5.17 3.52 3.76 3.76 4.61 4.61 3.52 4.55 4.55 4.49 4.46 4.49 5.07 5.07 4.46 5 .05 5.05 NORTH NORTH NORTH NORTH 5.02 5.02 SUMATRA SUMATRA KALIMANTANKALIMANTAN 5.11 5.11 6.53 6.53 NORTH NORTH SULAWESI SULAWESI 5.20 5.20 RIAU RIAU 2.74 2.74 EAST EAST KALIMANTANKALIMANTAN RIAU ISLANDSRIAU ISLANDS WEST GORONTALOGORONTALO WEST WEST WEST 6.89 6.89 NORTH MALUKUNORTH MALUKU 4.89 4.89 KALIMANTAN 6.67 6.67 SUMATRA SUMATRA KALIMANTAN 4.12 4.12 5.16 5.16 4.95 4.95 CENTRAL CENTRAL JAMBI JAMBI CENTRAL CENTRAL SULAWESI SULAWESI WEST PAPUAWEST PAPUA 4.31 4.31 BABEL ISLANDSBABEL ISLANDS KALIMANTANKALIMANTAN 6.07 6.07 2.96 2.96 3.05 3.05 5.31 5.31 WEST WEST SOUTH SOUTH SULAWESI SULAWESI SOUTH SUMATRASOUTH SUMATRA KALIMANTANKALIMANTAN 4.67 4.67 SOUTHEASTSOUTHEAST BENGKULU BENGKULU5.67 5.67 3.72 3.72 SULAWESI SULAWESI PAPUA PAPUA 4.95 4.95 6.18 6.18 -15.11 MALUKU MALUKU -15.11 LAMPUNG LAMPUNG SOUTH SOUTH 5.24 5.24 5.16 5.16 SULAWESI SULAWESI JAKARTA JAKARTA 7.21 7.21 6.07 Java (58J%ava) (58%) 6.07 5.82 5.82 WEST JAVA WESTCENTRAL JAVA JAVACENTRAL JAVA BANTEN BANTEN 5.72 5.14 5.145.66 5.66 5.72 5.41 5.41 BALI BALI NTB 5.67 5.67 5.67 5.67 EAST JAVA EAST JAVA NTB 5.34 5.34 6.26 5.32 5.32 6.26 5.56 5.56 YOGYAKARTAYOGYAKARTA 6.01 6.01 SulampuSau (la9m%p) ua (9%) NTT NTT BalinusrBa a(3lin%u)sra (3%) 6.80 6.80 3.87 3.87 5.03 5.28 5.03 5.28 4.36 4.68 4.36 4.68 2.26 2.26 1.23 1.56 1.23 1.56 0.66 0.66

(0.74) (0.74)

GDRP ≥GDRP 7.0% ≥ 7.0% 6.0% ≤ 6.0%GDRP ≤ < GDRP 7.0% < 7.0%5.0% ≤ 5.0%GDRP ≤

Spatially, a number of regions have economic growth from the slowing down in also recorded stronger growth (Graph manufacturing industry amids sluggish global 9). Economic growth on the island of Java demand. Similarly, Sumatra’s economy is is predicted to reach 5.6% in 2019 on the expected to expand by 4.6% with the support back of solid household and government of exports, palm oil in particular, partly as an consumption in line with the government’s impact of B20 policy expansion to domestic social assistance program (bansos) and village market. Economic growth in Kalimantan island fund disbursements as well as spendings is also predicted to accelerate by 5.2% buoyed on general election (Pemilu). Such solid by consumption, investment, and coal-related consumption is therefore able to contained exports. Bali and Nusa Tenggara (Balinusra)

14 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Kalimantan (8%K)alimantan (8%) Sumatra (22%)Sumatra (22%) NATIONAL NATIONAL 5.92 5.92 5.49 5.41 5.59 5.49 5.41 5.59 4.71 4.71 5.18 5.18 ACEH ACEH 5.17 5.17 3.52 3.76 3.76 4.61 4.61 3.52 4.55 4.55 4.49 4.46 4.49 5.07 5.07 4.46 5.05 5.05 NORTH NORTH NORTH NORTH 5.02 5.02 SUMATRA SUMATRA KALIMANTAN KALIMANTAN 5.11 5.11 6.53 6.53 NORTH NORTH SULAWESI SULAWESI 5.20 5.20 RIAU RIAU 2.74 2.74 EAST EAST KALIMANTAN KALIMANTAN RIAU ISLANDS RIAU ISLANDS WEST GORONTALO GORONTALO WEST WEST WEST 6.89 6.89 NORTH MALUKU NORTH MALUKU 4.89 4.89 KALIMANTAN 6.67 6.67 SUMATRA SUMATRA KALIMANTAN 4.12 4.12 5.16 5.16 4.95 4.95 CENTRAL CENTRAL JAMBI JAMBI CENTRAL CENTRAL SULAWESI SULAWESI WEST PAPUA WEST PAPUA 4.31 4.31 BABEL ISLANDS BABEL ISLANDS KALIMANTAN KALIMANTAN 6.07 6.07 2.96 2.96 3.05 3.05 5.31 5.31 WEST WEST SOUTH SOUTH SULAWESI SULAWESI SOUTH SUMATRA SOUTH SUMATRA KALIMANTAN KALIMANTAN 4.67 4.67SOUTHEAST SOUTHEAST BENGKULU 5.67BENGKULU 5.67 3.72 3.72 SULAWESI SULAWESI PAPUA PAPUA 4.95 4.95 6.18 6.18 -15.11 MALUKU MALUKU -15.11 LAMPUNG LAMPUNG SOUTH SOUTH 5.24 5.24 5.16 5.16 SULAWESI SULAWESI JAKARTA JAKARTA 7.21 7.21 6.07 Java (58%) Java (58%) 6.07 5.82 5.82 WEST JAVA CENTRALWEST JAVA JAVA CENTRAL JAVA BANTEN BANTEN 5.72 5.14 5.66 5.14 5.66 5.72 5.41 5.41 BALI NTB BALI 5.67 5.67 5.67 5.67 EAST JAVA EAST JAVA NTB 5.34 6.26 5.34 5.32 5.32 6.26 5.56 5.56 YOGYAKARTA YOGYAKARTA 6.01 6.01 Sulampua (9%)Sulampua (9%) NTT NTT Balinusra (3%) Balinusr a6 .(830% ) 6.80 3.87 3.87 5.03 5.28 5.03 5.28 4.36 4.68 4.36 4.68 2.26 2.26 1.23 1.56 1.23 1.56 0.66 0.66

(0.74) (0.74)

GDRP ≥ 7.0% GDRP ≥6.0% 7.0% ≤ GDRP 6.0%< 7.0% ≤ GDRP <5.0% 7.0% ≤ GDRP 5.0% < 6.0% ≤ GDRP < 6.0% 4.0% ≤ GDRP 4.0% < 5.0% ≤ GDRP 0%< 5.0% ≤ GDRP <0% 4.0% ≤ GDRP GDRP< 4.0% < 0% GDRP < 0%

economy is projected to reach a 4.9% growth, outlook in 2020 remains promising, except for driven by recovery in tourism sector as well Kalimantan. Region in Java, Sumatra, Balinusra, as exports, copper in particular. Conversely, and Sulampua is expected to grow by 5.5-5.9%, economic growth in Sulawesi, Maluku, and 4.5-4.9%, 5.6-6.0%, 6.5-6.9% respectively. In Papua (Sulampua) is moderated to 2.7% contrast, economy of Kalimantan is projected to impacted by contraction in copper export record a moderate growth of 4.0-4.4%, affected in Sulawesi and slowing production activity by increased capital goods and construction in nickel-related manufacturing industry in imports to support investment in mining Sulawesi. Nevertheless, spatial economic industry as well as slowing coal export growth.

15 BANK INDONESIA’S ANNUAL MEETING 2019

Table 3. Indonesia’s Balance of Payments (BoP)

2018* 2019** Component (USD billion) 2017

I II III IV Total I II III

Current Account -16.2 -5.0 -7.8 -8.5 -9.2 -30.5 -6.7 -8.2 -7.7

A. Goods 18.8 2.3 -7.8 -8.5 -9.2 -30.5 1.2 0.5 1.3

- Export, fob 168.9 44.4 43.7 47.7 44.9 180.7 41.2 40.2 43.6

- Import, fob -150.1 -42.1 -43.5 -48.2 -47.5 -181.2 -40.0 -39.7 -42.4

a. Non Oil & Gas (Net) 26.2 4.7 3.1 3.1 0.3 11.2 3.4 3.5 3.4

b. Oil & Gas(Net) -7.3 -2.4 -2.8 -3.6 -2.9 -11.6 -2.2 -3.0 -2.2

B. Services, Primary Income, & -35.0 -7.3 -8.1 -8.0 -6.6 -30.0 -7.9 -8.6 -8.9 Secondary Income

Capital and Financial 28.7 2.2 3.1 4.0 15.6 24.8 10.1 6.5 7.6 Account

1. Direct Investment 18.5 4.8 2.4 4.5 1.6 13.3 5.8 5.4 4.8

2. Portfolio Investment 21.1 -1.1 0.1 -0.1 10.5 9.3 5.2 4.6 4.8

3. Other Investment -10.7 -1.5 0.6 -0.5 3.6 2.2 -1.1 -3.5 -2.1

Overall Balance 11.6 -3.9 -4.3 -4.4 5.4 -7.1 2.4 -2.0 0.0

Memorandum:

- Reserve Assets Positions 130.2 126.0 119.8 114.8 120.7 120.7 124.5 123.8 124.3

(in Month of Import and 8.3 7.6 6.9 6.3 6.4 6.4 6.7 6.8 6.9 Official Debt Repayment)

- Current Account (% GDP) -1.60 -1.94 -2.96 -3.22 -3.58 -2.93 -2.51 -2.93 -2.66

Source: Bank Indonesia Notes: *Preliminary data, **Projected data Indonesia’s Balance of Payments (BOP) from a smaller current account deficit, which demonstrated maintained external reduced to USD7.7 billion (2.7% of GDP) in sector resilience despite global economic the third quarter of 2019 from USD8.2 billion moderation. The BOP in the third quarter of (2.9% of GDP) in the second quarter of 2019. 2019 is roughly balance, improved significantly Meanwhile, the capital and financial account from the deficit of USD2.0 billion in the surplus increased to USD7.6 billion in the third previous period (Table 3). The gains stemmed quarter of 2019 from USD6.5 billion in the

16 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Graph 10. Exchange Rate: Appreciation (+) previous period. The position of international /Depreciation (-) reserve at the end of October 2019 stood at THB 7.24 USD126.7 billion, up from USD120.7 billion at PHP 3.59 the end of 2018, equivalent to 7.4 months of IDR 2.44 JPY 1.63 imports or 7.1 months of imports and servicing SGD 0.06 government external debt, which is well above MYR -1.07 INR -1.64 the international adequacy standard of three CNY -2.28 months. Moving forward, the current account EUR -2.64 BRL -3.44 deficit is expected to decline to around 2.7% of KRW -4.53 ZAR -4.73 GDP in 2019 and then remain manageable in TRY -7.40 (%,ytd) 2020 in the range of 2.5-3.0% of GDP, while the -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 capital and financial account surplus remains Source: Reuters, Bloomberg, data as 31st October 2019 large, thereby supporting external resilience. monetary policy response in advanced Bank Indonesia will continue to strengthen countries. Seeking to reinforce exchange rate policy synergy with the Government and policy effectiveness and strengthen domestic other relevant authorities in order to increase financing, Bank Indonesia constantly strives external resilience, including efforts to attract to accelerate financial market deepening, foreign direct investment (FDI). targeting the money market and foreign exchange market. Foreign exchange market The rupiah has appreciated in line with development has contributed to increased sound BOP performance. Since the beginning transaction volume on the forex market as well of the year, the rupiah had gained 2.44% (ytd) as convergence of foreign Non-Deliverable as of the end of October 2019 (Graph 10). Forward (NDF) exchange rate, spot transaction The strong rupiah has been supported by exchange rate, and Domestic Non-Deliverable maintained foreign capital inflows together Forward (DNDF) exchange rate (Graph 11). with a well-functioning foreign exchange supply and demand mechanism from the business sector. In addition, less global financial Graph 11. Rupiah Exchange Rate: Convergence of Spot, DNDF, and NDF market uncertainty translated into positive (IDR/USD) sentiment for the rupiah. Moving forward, 15100 Bank Indonesia expects rupiah exchange rate 14900 stability in line with the currency’s fundamental 14700 value and maintained market mechanisms. This 14500 is supported by the prospect of maintained 14300 foreign capital inflows to Indonesia due to the 14100 sound domestic economic outlook coupled 13900 with attractive yields in portfolio investment 11 12 1 2 3 4 5 6 7 8 9 10 11 2018 2019 and the positive impact of the accommodative Spot 1 Month DNDF 1 Month NDF

Source: Reuters

17 BANK INDONESIA’S ANNUAL MEETING 2019

Graph 13. National Inﬂation Realization and Target Low and stable inflation remains under (%, yoy) control. Annually, headline inflation in 7

October 2019 was recorded at 3.13% (yoy), 6

unchanged from the level at the end of 2018. 5

All components of headline inflation were 4

low. Controlled core inflation was supported 3 3.4 3.6 3.0 3.1 3.1 by anchored inflation expectations as a result 2

of policy consistency by Bank Indonesia to 1

maintain price stability, managed aggregate 0 demand, stable exchange rate movement, and 2015 2016 2017 2018 2019* limited impact of global prices. In addition, Range Inﬂation Target Inﬂation Realization volatile food experienced deflationary Source: BPS-Statistics Indonesia & Bank Indonesia Notes: *Projected pressures in line with price corrections affecting Financial system stability has been various food commodities, while inflationary maintained despite the bank intermediation pressures on administered prices remained low, function demand vigilance. A high Capital both of which contributed to control inflation Adequacy Ratio (CAR) in the banking industry, (Graph 12). Moving forward, Bank Indonesia recorded at 23.19% in September 2019, is will consistently maintain price stability and indicative of maintained financial system strengthen policy coordination with the central stability along with the low level of non- and local governments to control inflation. performing loans (NPL), namely 2.66% (gross) For the year, Bank Indonesia projects inflation or 1.18% (net) (Graph 14). Moreover, public at around 3.1% in 2019, representing the fifth listed corporations have maintained solid consecutive year that the inflation target has performance in line with sound repayment consistently been achieved, and in the 3.0±1% capacity, which has further supported range in 2020 (Graph 13). financial system stability. Nevertheless,

Graph 12. Inﬂation: Core, Volatile Food, and Graph 14. Banking Industry Capital Adequacy Ratio Administered Prices and Non Performing Loan

(%, yoy) (%) (%) 16.00 5.0 25 14.00 25 12.00 4.5 24 23.2 24 10.00 4.0 23 8.00 4.82 3.5 23 6.00 22 4.00 3.0 3.2 2.7 22 2.00 2.5 21 0.00 1.58 21 -2.00 2.0 20 1 3 5 7 9 111 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 111 3 5 7 9 10 4 8 12 4 8 12 4 8 12 4 8 9

2015 2016 2017 2018 2019 2016 2017 2018 2019

Core Volatile Food Administered Prices NPL (Gross) CAR (rhs)

Source: BPS-Statistics Indonesia Source: Financial Service Authority (OJK), calculated

18 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Graph 16. Currency in Circulation Growth growth of outstanding loans disbursed (IDR trillion) (%, yoy) by the banking industry moderated from 900 30 11.75% (yoy) in December 2018 to 7.89% 800 25 (yoy) in September 2019, primarily weighed 700 20 600 15 down by limited corporate demand for loans 500 10 400 4.49 (Graph 15). Conversely, the banking deposit 5 300 grew about 7.47% (yoy) in September 2019, 200 0 slightly higher than the growth of 6.45% 100 -5 0 -10 (yoy) in December 2018. Bank Indonesia 1 3 5 7 9 111 3 5 7 9 111 3 5 7 9 111 3 5 7 9 1113 5 7910 believes the accommodative monetary and 2015 2016 2017 2018 2019 macroprudential policy mix together with Cash in Circulation Growth Cash in Circulation (rhs) improved economic prospects along with Source: Bank Indonesia Goverment efforts to accelerate investment credit cards, and electronic money grew 32.1% will effectively stimulate credit growth without (yoy) in October 2019, dominated by ATM/debit disrupting financial system stability. Therefore, cards with a 94.5% share. Impressive growth Bank Indonesia projects credit growth to reach of e-money transactions was maintained in around 8% in 2019 and 10-12% in 2020, with October 2019 at 268.0% (yoy) in line with deposit growth expected to reach around 8% in greater public uptake of digital currency and 2019 and 8-10% in 2020. broader e-money integration into the nascent digital ecosystem (Graph 17). Moving forward, The payment systems, both cash and non- Bank Indonesia constantly strives to advocate cash, remain uninterrupted. The position expansion of the electronification program of currency in circulation grew 4.49% (yoy) of Government’s social assistance program, in October 2019 (Graph 16). While non-cash various public transportation, and local payment transactions using ATM/debit cards, government transactions. In addition, Payment

Graph 15. Banking Credit and Deposit Growth Graph 17. Electronic Money Growth (%, yoy) (%, yoy) (%, yoy) 37 32.1 420 16 32 31.6 370 14 27 26.8 320 12 22 270 17 10 7.9 220 8 12 7 170 6 7.5 2 120 4 4.5 -3 70 2 -8 20 0 -13 -30 3 6 9 12 3 6 9 12 3 6 9 12 3 6 9 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 2016 2017 2018 2019 2016 2017 2018 2019

Deposit Credit ATM-Debit Card Credit Card Total E-money (rhs)

Source: Financial Service Authority (OJK), calculated Source: Bank Indonesia

19 BANK INDONESIA’S ANNUAL MEETING 2019

System Innovations will be accelerated in order to speed up digitalisation in financial sector as Bank Indonesia Policy Mix: Maintaining well as national integration of economic and Stability, Boosting Growth Momentum finance digitalisation through various initiatives. Maintained national economic performance In the medium term, the domestic economy in Indonesia is the fruit of close policy is expected to achieve an upward trajectory. synergy between the Government, Bank This outlook is a fruit of structural reforms that Indonesia, and Indonesian Financial are predicted to improve not only economic Services Authority (OJK). Against the growth but also the quality of growth. inauspicious backdrop of global economic Higher economic growth in medium term is moderation on one hand and high global supported by consistent implementation of market uncertainty on the other, a balance structural reforms in four main target areas: between stability and stimulating growth must i) infrastructure development that connects be maintained, something that is easier said economic zones such as industry, tourism, than done. In 2018, for example, when several and MSME with distribution networks; ii) emerging markets, including Indonesia, faced deregulation and simplification of bureaucracy the growing risk of external crisis prompted to encourage investment and employment; by a significant sudden capital reversal and iii) economic transformation from natural depreciatory pressures on exchange rates, the resources to competitive manufacturing, overarching policy priority was still to maintain and (iv) strengthening the quality of human stability. Moreover, at the time, Indonesia also resources in terms of core competency and faced the issue of a large current account advancement of science and technology. The deficit. Nevertheless, the priority policy series of structural reform policies mentioned approach has seen tremendous results in terms above will mobilize higher level of production of restoring rupiah exchange rate stability and factors, both capital and labor, improve reinforcing solid external sector resilience in economic efficiency and productivity, thus Indonesia. In 2019, the fruits of our hard work enables Indonesian economy to grow at have unlocked adequate space for policies to a higher level without sacrificing stability. prioritise catalysing growth momentum, while With that backgroud, Indonesian economy is continue to maintain stability. predicted to grow 5.2-5.6% in 2021 and increase to 5.5-6.1% in 2024 with current account deficit In 2018, Bank Indonesia prioritised monetary declining from 2.5-3.0% of GDP in 2021 to policy toward exchange rate stabilisation around 2.3-2.8% of GDP in 2024. Inflation will be and, in conjunction with the Government, maintained within the range of 2.0-4.0% until managing the current account deficit. To that 2024. Under these conditions, we are optimistic end, Bank Indonesia instituted pre-emptive and that the ultimate goal of our beloved country, ahead-the-curve monetary policy by hiking the Indonesia, praised as a high-income country in policy rate six times by a total of 175bps to 2045 will be realized. 6.0% during the period from May-November

20 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

2018. Bank Indonesia further stabilised the and Islamic economy and finance development rupiah through intervention in the spot market, in order to build economic growth momentum. Domestic Non-Deliverable Forwards (DNDF), Bank Indonesia will maintain a similar and by purchasing Government Bonds (SBN) accommodative policy mix in 2020. in the secondary market. To avoid the adverse impact of such stabilisation measures on Bank Indonesia will Maintain an growth, Bank Indonesia loosened other policy Accommodative Monetary Policy instruments. A liquidity injection was provided Stance in 2020 by reducing the Rupiah Reserve Requirements and expanding monetary operations, while Bank Indonesia has relaxed monetary policy macroprudential policy was relaxed through an in 2019 through policy rate reductions increase in the loan-to-value (LTV)/financing- and liquidity injections in the banking to-value (FTV) ratio and by expanding the industry. Since July 2019, we have lowered Macroprudential Intermediation Ratio (MIR). the policy rate four times by a total of 100bps This various policy mix effectively reversed the to 5.0%. In addition to increase bank lending economic conditions since the fourth quarter capacity, lower interest rates are expected to of 2018, namely that investor confidence was stimulate investment and facilitate financing restored, foreign capital inflows returned, from the corporate sector. To ensure adequate and rupiah exchange rates were stabilised. liquidity in the banking industry for lending, Furthermore, contrary to the increase of Bank Bank Indonesia lowered the Rupiah Reserve Indonesia’s policy rate, the lending rate was Requirement by a further 100bps to 5.5% in actually declined. June and November 2019. Moreover, we have strengthened the monetary operations strategy In 2019, with stability maintained, primarily to ensure adequate liquidity in the money in the form of low inflation and stable market and accelerate the transmission of exchange rates, Bank Indonesia has pointed accommodative policy. Finally, Bank Indonesia all policy instruments toward catalysing has stabilised rupiah exchange rates in line with economic growth momentum. Bank the its fundamental value, while maintaining Indonesia has lowered the policy rate, loosened market mechanisms. liquidity, and stabilised rupiah exchange rates. Furthermore, Bank Indonesia continued Effective monetary policy transmission has to loosen macroprudential policy. The been underpinned by adequate liquidity in accommodative monetary and macroprudential the banking industry combined with a stable policy mix has been directed toward increasing and efficient money market. The average supply and demand for bank intermediation daily transaction volume on the interbank and other economic financing to stimulate money market remained high in October 2019 growth. Likewise, accommodative policy stance at Rp18.12 trillion. Adequate liquidity was was also implemented through other policies of also maintained in the banking industry, as payment system, financial markets deepening, reflected by a ratio of liquid assets to deposits

21 BANK INDONESIA’S ANNUAL MEETING 2019

Graph 19. Banking Industry Interest Rates of 18.44% in October 2019. Consequently, (%) interbank rates faced declines on all tenors, 16

including the overnight interbank rate, which 14 was recorded at 5.04% in October 2019 (Graph 12 11.51 18). Furthermore, the banking industry has 10.61 10 10.26 also started to reduce deposit rates, although 10.04 8 remained limited. The weighted average deposit rate fell 38bps on the level recorded 6 6.45 in June 2019 to 6.45% in October 2019. The 4 2 4 6 81012 2 4 6 81012 2 4 6 81012 2 4 6 81012 2 4 6 810 banks have also begun to lower lending rates, Credit Rate Deposit Rate Investment Credit Rate led by investment loans and working capital Consumer Credit Rate Working Capital Credit Rate loans, for which interest rates currently average Source: Bank Indonesia 10.04% and 10.26% respectively (Graph 19). well as the timing. This is necessary to manage By maintaining an accommodative monetary inflation remains within the 3.0±1% target policy stance, Bank Indonesia has given the corridor, to maintain external sector stability, banking industry no more reasons to postpone and to catalyse economic growth momentum. further reductions in lending and deposit rates moving forward. Accommodative Macroprudential Policy for Driving Economic Financing The accommodative monetary policy stance pursued in 2019 will be maintained to 2020. Bank Indonesia will maintain an We will remain vigilant of domestic and global accommodative macroprudential policy economic developments in using its room to stance to stimulate bank intermediation and implement accommodative monetary policy drive economic financing. In 2019, we relaxed in terms of the instruments (interest rates and/ the loan-to-value (LTV)/financing-to-value or reserve requirements), the magnitude, as (FTV) ratio by a further 5-10% in order to drive house and vehicle ownership, including green Graph 18. Policy Rate and Overnight Interbank Rate buildings and vehicles (Graph 20). We also (%) increased the Macroprudential Intermediation 7.00 6.75 6.50 Ratio to 84-94% and extended bank funding to 6.00 5.75 6.00 include prudent foreign loans (Graph 21). Going 5.50 5.00 5.00 5.25 forward, we will continue our accommodative 5.04 4.50 macroprudential policy in 2020 with a focus 4.00 4.25 3.50 on MSME and priority sector development, 3.00 including exports and tourism. 2.50 2.00 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 Lower corporate demand is currently the 2018 2019 primary determinant of subdued bank BI7DRR Deposit Facility Lending Facility PUAB O/N Source: Bank Indonesia lending (Graph 22). The banking industry has

22 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Graph 20. Average LTV/FTV Ratio Down Payments on Graph 22. Estimated Lending Demand and Supply Property and Motor Vehicles Loans (%) (Log) (Log) 22 23 8.7 0.1 8.6 0.05 17 17 8.5 8.4 13 0 12 8.3 8.2 -0.05 8.1 -0.1 8 7.9 -0.15 1 3 5 7 9 111 3 5 7 9 111 3 5 7 9 111 3 5 7 9 111 3 5 7 9 Motor Before Recent Before Recent Property 2015 2016 2017 2018 2019 Vehicle

House/Shop with House Motor Vehicle Environmentally Friendly Excess Supply (+)/Demand (-) (rhs) Demand Supply

Source: Bank Indonesia Source: Bank Indonesia, staﬀ calculation maintained adequate lending capacity in line production and investment activities have also with various Bank Indonesia policies, such as been reflected by declining imports of raw lower interest rates, liquidity injections, and an materials and capital goods. Nevertheless, Bank accommodative macroprudential policy. As I Indonesia is confident that the recent slump mentioned previously, liquidity in the banking will be overcome in 2020, with credit growth system is more than adequate. Furthermore, projected to pick up based on low interest the latest Banking Survey conducted by rates, adequate liquidity, accommodative Bank Indonesia in the third quarter of 2019 macroprudential policy, and the promising also revealed comparatively relaxed lending economic outlook. In addition, economic standards (Graph 23). Meanwhile, restrained financing through the capital market in the demand for loans from the corporate sector form of stocks, bonds, and securities is also set has also been confirmed by relatively low to increase. non-building investment growth. Sub-optimal

Graﬁk 21. Macroprudential Intermediation Ratio Graph 23. Lending Standard Index

(%) (Index) 100 94 40 92 95 30 90 84 20 12.4 12.0 85 6.6 11.8* 80 10

Tighten 3.8 Adding loans 80 or ﬁnancing RIM Implementation received by 0 (Adding SSB in certain banks as 75 criteria owned by the bank a component in the calculation of RIM) of RIM -10 70 I II III IV I II III IV I II III IV I II III IV 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 Loosen 2018 2019 2016 2017 2018 2019

Lower Limit Upper Limit

Source: Bank Indonesia Source: Bank Indonesia Banking Survey, Q3/2019 Notes: *Projection

23 BANK INDONESIA’S ANNUAL MEETING 2019

Graph 24. Innovative Financing for Infrastructure Accelerating Financial Market IDR billion Deepening 25,000 23,590 Total: IDR 48.97 Trillion Accelerating financial market deepening 20,000

has strengthened the effectiveness 15,000 of accommodative monetary and 11,340 macroprudential policies. Bank Indonesia 10,000 9,400 6,320 will continue to increase transaction volume 5,000 3,000 and foster the use of various money market 2,650 1,500 572 750 and foreign exchange market instruments, - RDPT EBA EBA-SP DIRE DINFRA Project Green Global Perpetual Bonds Bonds Bonds Bonds including Domestic Non-Deliverable Forwards -IDR (DNDF), Interest Rate Swaps (IRS) and Overnight Source: Indonesian Central Securities Depository (KSEI) Notes: Data as of August 2019 Index Swaps (OIS) as well as Commercial Papers (SBK). Likewise, the development of money Payment System Policy for market infrastructures such as Electronic Trading Electronification and Economic Platforms (ETP) and a Central Counterparty Efficiency (CCP) for derivative transactions, will be complemented in order to strengthen other Bank Indonesia will continue to direct payment financial market infrastructures. In addition to system policy toward supporting electronic enriching hedging alternatives, this policy will and economic efficiency. The non-cash also deepen the short-term securities market. payment system electronification programs, currently targeting on government social Bank Indonesia will continue to promote aid program disbursements, transportation instruments to finance infrastructure modes, and the financial operations of various in conjunction with the Indonesian provincial governments, will be extended as Government and Financial Services measure to support public purchasing power Authority (OJK). We continue to develop and consumption (Table 4). Furthermore, various innovations in terms of infrastructure the efficiency of retail transaction settlement financing, such as Infrastructure Investment through the Bank Indonesia National Clearing Fund - Collective Investment Contracts System (SKNBI) will be improved to accept larger (DINFRA), asset-backed securities, project transactions and settle those transactions faster bonds, and green bonds (Graph 24). In October and at a lower cost (Table 5). Interconnectivity 2018, during the IMF-World Bank Annual and interoperability in the National Payment Meetings in Bali, private financing was secured Gateway (NPG) will also be expanded. On the for 21 infrastructure projects worth USD13.6 cash side, the efficiency and distribution of billion. In December 2019, we expect to sign currency in circulation will be improved in private financing for 14 additional infrastructure various regions of the archipelago, including projects to the tune of Rp53.3 trillion. remote and frontier regions (Graph 25).

24 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Moving forward, in addition to electronification largest, and from individual consumers to programs mentioned previously, payment MSMEs and large corporations. To that end, system policy will focus on supporting the Bank Indonesia has launched the Indonesia integration of digital economy and finance, Payment System (IPS) Blueprint 2025 in including the development of economic and which the following five visions are outlined: financial inclusion. To that end, Bank Indonesia 1. IPS 2025 reinforces the integration of strengthens digital-based instruments and national digital economy and finance to public infrastructure, particularly in the retail assure the proper functioning of central payment systems, strengthens financial bank mandate in money creation and market infrastructures (FMI) and the payment circulation, monetary policy, and financial ecosystem as well as expands the use of non- system stablility as well as to support cash instruments for economic and financial financial inclusion; transactions. Furthermore, Bank Indonesia will 2. IPS 2025 fosters digital transformation also strive to foster synergy and collaboration within the banking industry to sustain between fintech/e-commerce and MSMEs the bank’s role as a primary institution in through on-boarding programs in various the digital economy and finance through regions. the implementation of Open Banking standard as well as the deployment of Payment System Innovation: digital technology and data on their Integration of Digital Economy and financial product and services; Finance 3. IPS 2025 assures the interlinkage between fintech and banks to contain We develop innovation in payment systems the escalation of shadow-banking risk to support the digital economy and finance. through the regulation of the use of Bank Indonesia is confident that digital digital technology (e.g. Application innovation will strengthen linkages between Programming Interface-API), business economic agents, from the smallest to the relation, and business ownership;

Tabel 4. Electroniﬁcation Table 5. Strengthening the National Clearing System (SKNBI) Non Cash Social 2018 Aid Program 2019 2018 2019* Nominal: IDR 17.52 T Nominal: IDR 32.65 T TARGET Receiver: 10 mil. Receiver: 10 mil. KPM TRANSFER COST (Bank to Society) IDR 5,000 IDR 3,500 IDR 14.73 T DISTRIBUTION PROGRESS IDR 26.94T until Q-III COST DISTRIBUTION TARGET (%) PER TRANSACTION 84.04 % until Q-III 82.51 % IDR 1,000 IDR 600 (BI to Bank) IDR 17.5 T (99.53%) END OF PERIOD REALIZATION 5x 9x SETTLEMENT FUND (every 2 hours) (every 1 hour) 2018 Transportation 2019 Transaction Volume MAX. 547,92547.92 (million) 595.30 TRANSACTION IDR 500 million IDR 1 billion

5,888 Transaction Nominal (billion IDR) 11,514 *) as of September,1 2019

Source: Bank Indonesia Source: Bank Indonesia

25 BANK INDONESIA’S ANNUAL MEETING 2019

Aceh Graph 25. Distribution Network of Currency Circulation Lhokseumawe North Kalimantan North Sumatra Aceh North North Pematang Siantar Sulawesi Maluku Riau Islands

Riau Lhokseumawe Gorontalo West Kalimantan North West East Kalimantan Papua Sibolga Jambi North Sumatra Kalimantan Central North Balikpapan Sulawesi North Babel Pematang Siantar Papua Sulawesi Maluku Central Riau Islands West Sumatra Islands Kalimantan West Gorontalo Riau Sulawesi Southeast West Kalimantan Sulawesi Bengkulu Cirebon South West Kalimantan East Papua Sibolga Jambi South Sumatra Kalimantan Central Central Balikpapan Sulawesi SPU Java Babel Maluku Lampung DKU Papua Central Makasar West Sumatra Islands Tegal Kalimantan DKU Jember West Surabaya Southeast Banten Sulawesi Bali Sulawesi West Cirebon South Java Bengkulu Kalimantan Purwokerto South Sumatra Malang Central Tasikmalaya SPU Java Maluku D.I Yogyakarta Kediri Lampung West Nusa Tenggara DKU Makasar East Tegal Nusa Tenggara DKU Jember Surabaya Banten Bali SPU East 2nd Main Cash Depots West Java Cash Depots Oﬃce (CDO) -10 Purwokerto Cash Department – 33 Malang Tasikmalaya Distribution from SPU to CDO D.I Yogyakarta Kediri West Nusa Tenggara Distribution from East CDO to Cash Department Nusa Tenggara

Direct Distribution Notes: KPw = Regional Oﬃce SPU East 2nd Main Cash Depots

Source: Bank Indonesia Cash Depots Oﬃce (CDO) -10

Cash Department – 33 Distribution from SPU to CDO 4. IPS 2025 strikes the balance among transactions and domestic partnership for Distribution from innovation, consumer protection,CDO to Cash Departmentall foreign players under the consideration

integrity, and stability as wellDirect as Distributionfair of reciprocity principle. competition through the implementationNotes: KPw = Regional Oﬃce of digital Know Your Customer (KYC), Anti- Furthermore, the visions are implemented Money Laundering and Combatting the gradually through five salient initiatives (Graph Financing of Terrorism (AML-CFT), data/ 26). The goal is the integration of the digital information/public business openness, economy and finance to guarantee effective and the deployment of Reg-tech and money creation and circulation, monetary Sup-tech for reporting, regulation, and policy transmission, financial system stability as supervision; well as economic and financial inclusion (Graph 5. IPS 2025 safeguards the national interest 27). A full explanation of the blueprint and the on cross-border use of digital economy five initiatives are presented in the publication and finance through the obligation of of the Indonesia Payment System Blueprint domestic processing for all onshore 2025 entitled “Bank Indonesia: Navigating the

26 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Aceh

Lhokseumawe North North Sumatra Kalimantan North North Pematang Siantar Sulawesi Maluku Riau Islands

Riau Gorontalo West Kalimantan West East Papua Sibolga Jambi Kalimantan Central Balikpapan Sulawesi Babel Papua Central West Sumatra Islands Kalimantan West Sulawesi Southeast Sulawesi Bengkulu Cirebon South Kalimantan South Sumatra Central SPU Java Maluku Lampung DKU Makasar Tegal DKU Jember Surabaya Banten Bali West Java

Purwokerto Malang

Tasikmalaya D.I Yogyakarta Kediri West Nusa Tenggara East Nusa Tenggara

SPU East 2nd Main Cash Depots

Cash Depots Oﬃce (CDO) -10

Cash Department – 33 Distribution from SPU to CDO National Payment Systems in the Digital Era” and banks. Collaboratively, in conjunction with Distribution from CDO to Cash Department that we will be disseminating here today. the industry and other relevant authorities,

Direct Distribution Bank Indonesia will develop a standardised Notes: KPw = Regional Oﬃce First initiative: Developing Open Banking. Open Application Programming Interface (API), Bank Indonesia will encourage the banking incorporating data, technical, security, and industry, as the fulcrum of the financial system, governance standards. In addition to avoiding to undertake end-to-end digital transformation shadow banking, this initiative will accelerate to expand the use of digital applications in the development of retail payment systems providing various financial services to the and open up MSME financing opportunities on public, including in the retail payment systems. a broader scale. At the same time, innovation in retail payments by fintech continues to be encouraged, Second Initiative: Strengthening the including a development program for new start- Configuration of Retail Payment Systems. ups. Moreover, Bank Indonesia will build and Bank Indonesia will develop BI-FAST, a real time strengthen the interlinkage between fintech and 24/7 retail payment system infrastructure,

27 BANK INDONESIA’S ANNUAL MEETING 2019

Graph 26. Indonesia Payment System Blueprint Initiative 2025 5 Indonesia Payment System Blueprint Initiative 2025

Retail Regulations, Open Payment Money Market Data Licensing, Banking System Infrastructure Supervision

Standardization Integrated RTGS Regulatory Technical Aspect iInterface Payment ID Structure of API Payment CCP Integrated Standardization Fast Payment Licensing Safety Aspect Development CSD Integrated Of API (Bi-FAST) Data Hub Supervision Standardization ETP Sand box Contract Of Expand GPN Services (Rergtech, Suptech) Open API SSS Data Policy Data Integrated Standardization QRIS TR Reporting Cyber Safety

Government OJK Banking Fintech E-commerce

Industrial Approach Regulatory Approach Collaborative Approach

Source: Bank Indonesia

Graph 27. Indonesia Payment System Blueprint Outcome 2025

Banking Digital Financial Digital Financial Digitalization Inclusion Transactions Target Ratio Target Ratio Target Ratio

1.64x 2025 55.0 x

13.3x 1.23x 2019 32.3 x

6.03x 2019 2025 2019 2025

*As of June 2019 Source: Bank Indonesia

28 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

in lieu of SKNBI that is now operating. This is undertaken as an implementation of Bank infrastructure will be developed into an Indonesia Regulation (PBI) that has been integrated payment interface as a public enacted, including regulatory aspects for infrastructure for the retail payment system and market operator, to strengthen the trading simultaneously as a solution to address public platform and market discipline. demand for fast, mobile, secure, and low-cost transactions. The initiative includes improving Fourth Initiative: Developing Public payment system interconnection and Infrastructure for Data. Bank Indonesia realizes interoperability within the National Payment that data availabity, access, and protection Gateway (NPG) and BI-FAST which will continue are important aspects to the development to be encouraged by Bank Indonesia and the of digital economy and finance. Through this industry. In addition, QRIS implementation initiative, Bank Indonesia will develop a data will be strengthened in order to broaden hub as a public infrastructure to manage uptake and guarantee digital transaction granular payment transaction data, which will interoperability. Campaign for broader QRIS include the development of a Payment ID. acceptance will be executed in collaboration The data infrastructure will be strengthened with MSMEs in traditional markets, college through a payment transaction data protection campuses and millennial generation as well mechanism, including adequate consumer as bilateral cooperation with a number of consent architecture. Additionally, Bank countries. Indonesia continues to develop integrated reporting application, which is focused on Third Initiative: Strengthening Financial expanding payment data coverage, by utilizing Market Infrastructures. Bank Indonesia is the latest technology for a faster and more planning to modernise the Real Time Gross efficient reporting system. Settlement (BI-RTGS) system, Scripless Securities Settlement System (BI-SSSS) and Fifth Initiative: Strengthening the Electronic Trading Platform (BI-ETP) to third Regulatory, Licensing, and Supervisory generation systems in order to increase the Frameworks. This initiative will guarantee reliability of their services, both domestic the availability of an integrated regulatory, and cross-border, while in compliance with licensing, and supervisory frameworks to international standards and best practices, mitigate the risks while simultaneously foster namely the Principles for Financial Market innovation for further financial inclusion. This Infrastructures (PFMI). In addition, Bank initiative also covers integrated reporting Indonesia will accelerate the establishment and the utilisation of RegTech and SupTech of money market and foreign exchange for licensing and supervision, as well as market central counterparties, including trade strengthening Bank Indonesia’s sandbox repositories, in order to standardise over-the- function. counter derivative transactions in pursuance of Indonesia’s G20 commitments. This initiative

29 BANK INDONESIA’S ANNUAL MEETING 2019

Empowering the Islamic Economy and oriented toward boosting exports and tourism. MSMEs MSME clusters developed under Bank Indonesia program will continue to participate at national Bank Indonesia will also catalyse the and international exhibitions. We will continue to development of the Islamic economy and organise the annual Indonesian Creative Works finance as a new source of economic growth (KKI), in which this year event was opened by in Indonesia. Bank Indonesia strengthens the President of the Republic of Indonesia and the implementation of the halal value chain the First Lady, proving the success of our MSME ecosystem through empowering Islamic partners, with many going export and going boarding schools (pesantren) economy, Islamic digital. In that vein, Bank Indonesia has curated MSMEs and corporates, manufacturing industry a collection of fabrics from Indonesian Creative of food, fashion, cosmetics, tourism, and Works in a book called “Kain Nusantara 2019”, pharmacy, along with halal industry campaigns. which we will provide as a souvenir of today’s In addition to support to sharia banks, we will Bank Indonesia Annual Meeting. continue to accelerate Islamic financial market deepening to strengthen liquidity management Strengthening International Policy and and islamic financing. Furthermore, Bank Institution Indonesia will continue to optimise Islamic social finance in the zakat and waqf sectors International policy will be strengthened to promote inclusive Islamic financing (Graph to increase economic resilience and bolster 28). Meanwhile, we will continue to encourage growth momentum. Bilateral and multilateral efforts to establish Indonesia as a reference swap arrangements in the Asian region will centre for the global Islamic economy and be optimised. We also plan to expand the finance. In doing so, an international level of The existing local currency settlement for trade Indonesia Sharia Economic Festival (ISEF) that is and investment to our major trading partners, preceded by three regional level events of The including China, Japan, and India. Furthermore, Sharia Economic Festival (FeSyar) successfully we will continue to strengthen our Investor held up to this time, will be continued annually Relations Unit (IRU) linkages at head office as well as an integrated platform to support Islamic as regional and international offices to promote economy and finance. investment, tourism, and trade. In addition, we are also exploring partnerships in retail payment Bank Indonesia continues to expand the systems in accordance with national interests, MSME cluster development program. MSME among others through the interconnection of clusters in various regions for strategic food QRIS. commodities, such as rice, red chilies, shallots, garlic, and beef, are playing a crucial role to Internally, we will continue to advance the control inflationary pressures. Furthermore, ongoing institutional transformation of MSME clusters for handicrafts unique to the policy, organisation and business process culture of each respective region will be as well as human resources (HR) and culture

30 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

Graph 28. Pillars of Sharia Economic and Financial Development

World Sharia Economic and Finance Center

Achievement Sharia Business Sharia Financial Market Literation International Target Improvement Financing Depth Level Level Standing Sharia Business Sharia Financing Share Sharia Money Market Literation Index International Initiation Main Indicators Development (% per year) (% Total Financing) Outstanding Share (% GDP)

Sharia Economic Sharia Financial Research, Assesment, Main Strategics Empowerment Market Deepening Education Empowerment

Halal Value Regulation Research and Chain Assesment Infrastructure Main Institutional Education Instrument Programs Supporting Investor Base Institutional Infrastructure Institutional

Basic Regional Sharia Economic Policy National Sharia Economic Policy International Sharia Economic Policy Strategics Human Resources Data and Information Coordination and Team Work

Source: Bank Indonesia that we have kicked off since last year. This The transformation is further supported by the transformation is in line with Bank Indonesia’s implementation of various culture programs, policy mix. Various Bank Indonesia policies namely BI-Prestasi, BI-Inovasi, BI-Religi, and BI- have been translated into strategic programs Digital, as an integral part of overall institutional in order to achieve the new vision, namely to transformation to build a stronger and more provide a tangible contribution to the national credible central bank. economy and become the best central bank amongst the emerging markets. To that end, Strengthening Synergy for Resilience, the organisation and business prosess reforms Economic Transformation, and Digital that have been implemented successfully at the Innovation first phase, will be continued to the next phases to include the advancement of information As we previously mentioned, synergy, technology in organisation, finance, and HR. transformation, and innovation are three Likewise, the acceleration of HR development keywords in confronting the impact of the programs that have been conducted since diminishing of the globalization and the rising 2018 through a better planned, programmed, of the digitalisation. We have nurtured such and transparent HR management policy will a spirit at Bank Indonesia, both in executing be kept to progress. These programs play a of our own duties and in coordinating with critical role in creating leaders and personnel the Government and OJK, the House of that are competent, professional, and with the Representatives (DPR), the banking industry highest integrity and strong leadership skills. and business community, academia, media,

31 BANK INDONESIA’S ANNUAL MEETING 2019

and the whole society. I am confident that Synergy in terms of economic transformation this spirit will strengthen national economic will be directed toward catalysing stronger resilience and growth. economic growth, while strengthening the structure of the economy. We support Synergy in terms of macroeconomic government policy to stimulate economic and financial system policy mix will be growth through investment, infrastructure, and directed toward maintaining stability, competitive priority sectors with high value while optimizing the available space to added, such as manufacture and tourism. Our boost growth momentum. Policy synergy support will be implemented through various with the Government will be strengthened national and regional economic studies, in terms of controlling inflation through the strategic programs to reduce the current National Inflation Task Force (TPI) and the account deficit and spur growth as well as the Regional Inflation Task Forces (TPID), fiscal and establishment of new units at head office and monetary policy, as well as the real sector to the 46 regional offices of Bank Indonesia. A improve the current account deficit. Synergy quarterly coordination meeting with the central in terms of maintaining financial system and regional governments (RAKORPUSDA) stability will be strengthened through the is held in order to quickly resolve the various Financial System Stability Committee (KSSK). issues plaguing the manufacturing industry, Furthermore, bilateral coordination between tourism, investment, and infrastructure. We also Bank Indonesia with the Indonesian Financial promote investment and trade together with Services Authority (OJK) and Deposit Insurance the Government through the Investor Relations Corporation (LPS) will be increased. In addition, Unit (IRU) and five international Bank Indonesia Bank Indonesia will coordinate with the offices abroad. Similarly, we fully support the Ministry of Finance and OJK to accelerate the Government’s policy to develop the Islamic financial market deepening. In addition to economy and finance as a new source of strengthen policy transmission and financial economic growth. system stability, financial market deepening will also be oriented toward stimulating innovative Synergy in digital innovation is undertaken infrastructure financing through domestic and to ensure that the recently launched international private investors. Synergy with Indonesia Payment System Blueprint 2025 OJK and Government in anti-money laundering supports the integration of the national and counter terrorism financing (AML-CFT) digital economy and finance. We will will be further strengthen in particular facing continue to encourage the digitalisation of the the mutual evaluation process for Indonesia banking industry, its interlinkages with fintech, to become a member of Financial Action Task development of regional and national start- Force (FATF). ups as well as the evolution of fast, efficient,

32 SYNERGY, TRANSFORMATION, AND INNOVATION Toward an Advanced Indonesia

and reliable payment system infrastructures. Commission XI, along with the banking and In conjunction with the Government, OJK, financial industries, business community, industry, and associations, Bank Indonesia will academia, media, and various other parties. cultivate an integrated ecosystem incorporating e-commerce, fintech, and open banking, to Through such synergy, Indonesia has nurture the emergence of competitive national demonstrated solid resilience in the face of unicorns that can accelerate financial and global economic dynamics. Through such economic inclusion to support Indonesia’s synergy, we can improve the national economic economy for generations to come. outlook, backed by economic transformation and the development of innovation in the We will also constantly strengthen synergy with digital economy and finance, toward a the House of Representatives (DPR), in particular prosperous and advanced economy.

Thank you. Wassalamu’alaikum Warahmatullahi Wabarakaatuh,

Jakarta, 28th November 2019

Perry Warjiyo Governor of Bank Indonesia

33 BANK INDONESIA’S ANNUAL MEETING 2019